QUESTION: 81

Company A plans to acquire Company B.

Both firms operate as wholesalers in the fashion industry, supplying a wide range of ladies' clothing shops.

Company A sources mainly from the UK, Company B imports most of its supplies from low- income overseas countries.

Significant synergies are expected in management costs and warehousing, and in economies of bulk purchasing.

Which of the following is likely to be the single most important issue facing Company A in post-merger integration?

Identifying and removing surplus staff.
Understanding the management information system of the acquired firm.
Discussions with representatives from key customer accounts.
Discussions with anti-poverty campaigning groups.

Answer(s): B

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QUESTION: 82

A listed company is planning a share repurchase.

The following data applies:

· There are 10 million shares in issue

· The share repurchase will involve buying back 20% of the shares at a price of $0.75

· The company is holding $2 million cash

· Earnings for the current year ended are $2 million

The Directors are concerned about the impact that this repurchase programme will have on the company's cash balance and current year earnings per share (EPS) ratio.

Advise the directors which of the following statements is correct?

The cash balance will decrease by 75% and EPS will decrease by 25%.
The cash balance will decrease by 75% and EPS will increase by 25%.
The cash balance will decrease by 20% and the EPS will decrease by 25%.
The cash balance will decrease by 20% and the EPS will increase by 25%.

Answer(s): B

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QUESTION: 83

A company is currently all-equity financed with a cost of equity of 8%.

It plans to raise debt with a pre-tax cost of 4% in order to buy back equity shares.

After the buy-back, the debt-to-equity ratio at market values will be 1 to 2.

The corporate income tax rate is 30%.

Which of the following represents the company's cost of equity after the buy- back according to Modigliani and Miller's Theory of Capital Structure with taxes?

9.4%
8%
13.6%
9.8%

Answer(s): A

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QUESTION: 84

Company P is a pharmaceutical company listed on an alternative investment market.

The company is developing a new drug which it hopes to market in approximately six years' time.

Company P is owned and managed by a group of doctors who wish to retain control of the company. The company operates from leased laboratories with minimal fixed assets.

Its value comes from the quality of its research staff and their research.

The company currently has one approved drug which generates sufficient cashflow to cover day to day operations but not sufficient for major new research and development.

Company P wish to raise debt finance to develop the new drug.

Recommend which of the following types of debt finance would be most appropriate for Company P to help finance the development of this new drug.

6% Eurobond repayable at par in 5 years' time.
5% Bond repayable at par in 7 years' time.
3% Commercial Paper.
4% Convertible bond with a conversion ratio of 350 ordinary shares per bond.

Answer(s): D

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QUESTION: 81

QUESTION: 82

QUESTION: 83

QUESTION: 84